RBI gets tough; says, even guarantor to be tagged as wilful defaulter if obligations not met

The Reserve Bank of India (RBI) on Tuesday allowed banks to take action against guarantors on a loan, even without exhausting the remedies against the principal debtor, in case of a wilful default. If the principal debtor fails to make repayments, the banker will be able to proceed against the guarantor/surety even without exhausting the remedies against the principal debtor, said the RBI in a notification on wilful defaulters on its website, adding that the liability of the guarantor is immediate in case of a default. “In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter,” the central bank notification said.

Tightening noose around loan defaulters, the Reserve Bank today said guarantors, who refuse to fulfil their obligations to banks despite having adequate resources, will also be treated as wilful defaulters.
Once branded a wilful defaulter, a person or entity cannot access institutional credit. Such a person cannot hold office of director.
“In case the…guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter,” an RBI circular said.
However, this will be applicable prospectively and not to cases where guarantees were taken prior to the circular.
“Banks/Financial Institutions may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees,” the central bank said.
Elaborating, RBI said where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate.
A guarantor could be individual or a company.
Also, in cases where guarantees furnished by the Companies within the Group on behalf of the wilfully defaulting units are not honoured when invoked by the banks and financial institutions, such Group companies should also be reckoned as wilful defaulters, the circular said.
With an aim to deal firmly with wilful defaults in payment of Bank Loans like Kingfisher, the government is also planning to come out with a separate legislation in the next session of Parliament.
Recently, United Bank of India declared Kingfisher Airlines, its promoter Vijay Mallya and three other directors as wilful defaulter citing alleged diversion of funds. IDBI Bank is also considering similar action and is serving out a 15-day notice period on non-payment of dues.
As per the Contract Act 1872, the liability of surety is “co-extensive” with that of the principal debtor, unless it is otherwise provided by the contract.
Therefore, RBI said when a default is made in making repayment by the principal debtor, the banker will be able to proceed against guarantor or surety even without exhausting the remedies against the principal debtor.
Lenders have to inform RBI about guarantors while reporting wilful default cases.
There are over 40,000 cases worth Rs 1.73 lakh crore pending before various courts and Debt Recovery Tribunals. In March 2014, the Gross non-performing assets (GNPAs) in banking system gone up 4.4 per cent from 3.8 per cent of the total assets in the previous fiscal.
The Gross NPA of public sector banks jumped by 39 per cent to Rs 2.16 lakh crore at the end of March 2014 from Rs 1.55 lakh crore in the previous fiscal.
However, Gross NPA in case of private sector banks rose 13.76 per cent to Rs 22,744 crore as compared to Rs 19,992 crore at the end of March 2013.
During 2013-14, public sector banks recovered Rs 33,486 crore against the written-off amount of Rs 34,620 crore.